ECONOMYNEXT – Swap discounts of the rupee has widened and banks had further tightened the opening of letters of credit amid forex shortages market participants said as overnight liquidity injections continued to rise and short term gilt yield corrections reversed.
In the forex market swap discounts had further widened with foreign banks reducing their activity, market participants said.
Spot/1 month was quoted around -70/-50 cents
Spot/3-months had widened to -300/-250 from around -190/-150 last week.
Spot/6-months had widened to -700/-600 cents fro around -350/-300 cents.
The controversy over People’s Bank being ‘blacklisted’ by China had also impacted perceptions of some counterparties, market participants said.
As forex availability tightened, banks had further tightened the opening of letters of credit, financial sources said.
Sri Lanka’s three month Treasuries yield which had begun to correct upwards after price controls were lifted fell in November amid liberal injection of money from the 6.0 overnight window.
Currency pegs break and forex shortages emerged due to open market operations of soft-pegged central banks and outright bond purchases to maintain unrealistic gilt yields.
Window borrowings reached 312 billion rupees on November 17 from 261 billion rupees on October 29.
The central bank had been mopping up some of the excess money injected from the window into short banks in a sterilization trap.
“When banks borrow printed money from the overnight window to buy Treasuries, forex shortages worsens and it is more difficult to maintain the peg at 203 to the US dollar,” EN’s economics columnist Bellwether says.
“The central bank will then have to sell more dollars and lose more reserves to maintain the peg.”
“When dollars are sold more liquidity is injected to stop the overnight rates from going up and tightening the system.”
The central bank was also intervening in forex markets to give dollars for essential imports such as fuel, which also results in more rupee injections to maintain the overnight rates, or there will be a reduction of money withdraw through repo auctions.
Some secondary market quotes for bonds of several maturities were seen on Wednesday though there was little trading.
On Thursday at close a 15/12/2023 bond was quoted at 8.55/75 percent, dealer said.
A 15/03/2024 bond was quoted at 9.15/30 percent.
A 15/09/2024 bond was quoted 9.35/50 percent.
A 15/12/2024 bond was quoted 9.45/55 percent.
A 15/01/2027 bond was quoted 10.80/95 percent.
A 01/09/2028 bond was quoted 11.30/50 percent.
A 15/03/2031 bond was quoted 11.80/95 percent. (Colombo/Nov18/2021)